Financial relationships raise acute moral issues that suddenly appear to be at the heart of the problem. Why should burdensome obligations come with a duty to repay? Is it good to be in debt?

This isn’t a new story. In the early 1930s, the world went through a period of debt-deflation, in which the compulsion to repay forced down prices and increased the real level of debt. Today, we face a milder version of the same phenomenon as banks cut back lending to rebuild their capitalization. The resulting credit difficulties create downward pressure on prices and make for higher and less sustainable debt levels.

The problem is severe. Deflation produces radical anti-capitalism and a demand for a cancellation of debt. Revulsion against the market economy often takes the form of a specific condemnation of debt and debt instruments.

The Saudi cleric Grand Mufti Abdelaziz Al al-Sheikh made the case that the cause of the crisis is interest on debt, and that the sharia principle of risk participation would eliminate the problem. This is a very old answer. The Old Testament famously recommended a cancellation of debt every forty-nine years in a “jubilee.” The medieval church attacked usury. Such arguments are not built on simple obscurantism. Both the medieval church and Islam distinguish between debt that is exploitative, in which individuals are tied in debt servitude, and the relationship that arises out of a sharing of entrepreneurial risk. This tradition invites us to think about how debt today may inhibit free choice and the free development of the human personality.

These critics, ancient and modern, see debt as leading to a fundamental moral flaw. Today debt is much more prominent than it was in medieval Europe. Consumers in advanced industrial countries (and in particular the United States) rely on debt in order to buy. Treasury Secretary Paulson complained that the credit crunch was “making it more expensive for families to finance everyday purchases.” But dependence on debt polarizes societies. Bailout proposals run into opposition from those who are not so highly indebted and see an overall solution as a subsidy for the improvident.

One interpretation of modernity is that we borrow from one another on an increasingly grand scale for a reason, because we are convinced that our utility schedule is more important than someone else’s. If I see a beautiful piece of jewelry or a bright new car in a shop, I am convinced that it should be mine and that it can be more usefully employed in my possession than in that of someone else. In that way greed feeds on a kind of pride or self-regard. This problematical character of debt is captured in an ambiguous phrase of the Lord’s Prayer that refers not only to spiritual offense but to actual debt and was often in the past translated as “forgive us our debts.”

The meltdown of capitalism produced a big blame game both in the 1930s, when industrial capitalism broke down, and today, when it is financially driven capitalism that has gone awry. Today the collapse is widely thought to be the responsibility of poor regulators and monetary policy makers, or unscrupulous mortgage originators, or greedy bankers. Popular commentators like to go back to stereotypes from earlier eras, such as the figure of Gordon Gekko in Oliver Stone’s movie Wall Street who memorably proclaimed that “greed is good.”

The attributions of blame do not contemplate why a little bit of greed can produce such bad effects. Greed works as a doctrine of management because it is endlessly replicated in everyday behavior, by neighbors who borrow because they want to match other people’s consumption patterns, or buy bigger houses out of a competitive spirit. Wall Street moved prices by means of a “thundering herd,” but it is not the only locus of greed. We might equally look to popular culture, to game shows, or to shopping behavior. In November 2008, the same instincts that drove financial markets produced the post-Thanksgiving shopping consumption-intoxicated herd which trampled a store clerk to death in a Long Island Wal-Mart.

Solutions to the crisis include a simplification of finance, a return to lower levels of debt, and a reduction of flows across long distances. Some natural law traditions point in a very radical direction and demand regular cancellations of debt like the “jubilee.” But how can any of this be achieved?

A less radically intrusive approach would end the incentives that created powerful motives for households and corporations to increase their debt. In particular, the tax deductibility of mortgage-interest payments led to an excessive level of household debt; and tax deductions for interest led to high levels of corporate leverage. Some countries have already experimented with ending or reducing the levels of permissible mortgage-interest deduction.

Debt reduction is not only a good way of avoiding the constant repetition of the kind of disaster that emerging markets went through in the early 1980s and the late 1990s, and the whole world has experienced after 2007. It is also an example of the way in which the application of some natural law principles might lead to a healthier economy.


Harold James is Professor of History and Public Affairs at Princeton University. He is a Senior Fellow of the Witherspoon Institute, where he is also the Director of the Program in Ethics, Culture, and Economic Development. His most recent book is The Creation and Destruction of Value. He sits on the editorial board of Public Discourse.

Copyright 2010 the Witherspoon Institute. All rights reserved.

Many observers have commented that much conventional economics has failed empirically, in that it ignored themes such as financial instability or the possibility of multiple equilibria leading to sub-optimal outcomes. Such prominent figures as Paul Krugman have joined in the orgy of recrimination and castigation (though rarely self-castigation).There is no doubt about the extent of the empirical shortcomings, and that many prominent economists followed the maker of the rational choice revolution, Robert Lucas, in erroneously claiming that improved economics made financial crises an impossibility. Consequently, many people, including many economists, have complained that “economic theories failed just when we needed them most.”

As a result, the crisis has led to a battery of worrying policy initiatives. Will temporary surges in state spending to deal with the aftermath of banking crises lead to permanently higher levels of government spending and indebtedness? How can they be financed? Is there a danger of inflationary developments as a consequence of ballooning public sector deficits? Citizens should ask precisely what is worrying in the new policy initiatives: only with an articulation of that concern will it be possible to formulate legitimate policies. Often, complaints about the inadequacy of economics are linked to advocacy of some policy position in response to the crisis. Such policy positions are fiercely contested, and many of them appear linked to particular and powerful interests: banks and financial services, lawyers, automobile producers and automobile trade unions are all groups that have tried to assert that a general good depends on the subvention and rescue of their particular kind of activity.

Most recently, the issue of executive compensation has dominated national and international debates. What sorts of compensation level are appropriate, and how should these levels be determined? What criteria can be used in setting levels of compensation? Or is this an activity which the state should not be involved in at all, and which should be left as the outcome of market processes? The most divisive issue at the G-20 Pittsburgh meeting concerned precisely the appropriate response to the problem of remuneration in the financial sector. Most Americans are prepared to argue that high pay levels are not appropriate where losses mean that financial institutions need to be bailed out with public money. Some others argue that a distorted incentive system in the past led bankers to take inappropriate risks, and that consequently, for pragmatic reasons, the incentives should be better adjusted to mirror long-term performance (and also long-term social or general gains). By contrast, some European governments and thinkers suggested that excessive pay levels were in themselves wrong—regardless of whether they led to losses and inappropriate gains or not.

None of these controversies really address the causes of the perceived failure of conventional economics. The question remains whether this is simply a technical failure, or whether it derives from some more basic problem. Is there a more general failure because of an unwillingness among economists to discuss fundamental questions concerned with value?

What are the value of public goods such as currency stability? Why should we place a value on open markets? For what reasons should people have the opportunity of undertaking employment?

Sometimes discussions of such motivations revolve around concepts of natural rights: a right to employment, to a fair income, or to access to markets. What is the source of such rights, and how can conflicts of rights be arbitrated?

It is not surprising, then, that there is a new concern of some economists with justice and with ways of interpreting justice that do not necessarily involve the clash of two or more conflicting rights but rather as a way of developing potentials that are inherent in human beings. One interesting consequence of this new concern has been a revived interest in how different cultures have handled the problem of clashes of interest, as in Amartya Sen’s new book The Idea of Justice. Often the idea of precepts that can be derived from reason is traced back to Greek philosophy, especially to Aristotle, and especially as mediated in medieval philosophy in the writings of Averroes and Aquinas. But Sen has pointed out how Indian thinkers evolved a rather parallel discourse to that of Aristotle; Arthur Waldron has identified the same debate in China over two millennia ago.

It is reasonable to think that the crisis in empirical economics and the broader crisis in values are connected. This is where natural law thinking can be a powerful corrective. For in the natural law tradition, a body of guiding principles can be derived from the application of reason. But integrating the natural law tradition with contemporary economics may prove difficult.

One outstanding problem is that differing traditions of analysis have no way of speaking directly to each other. Moral philosophy is normative, while economics self-consciously avoids the creation of norms, and instead analyzes the relationships inherent in empirical data. The different approaches look as a consequence like endless parallel bars, inviting impossible intellectual and moral gymnastics between is and ought.

Both disciplines in consequence have their own very distinct version of a crisis. For moral philosophers, the world of the market does not behave as they hold it should, while economists have discovered that the market does not behave as they think it will.

There are also different views of the time framework for analysis, each of which presents its own peculiar problems. The concepts of justice are eternally valid, with the result that many will ask how they should adjust to a world which is constantly changing and generating new problems that require new analyses. By contrast, the problem of utility is that it may be a very short-term concept. Indeed, much of the literature on happiness has been devoted to showing that many forms of consumption generate only a short term surge in happiness without leading to a long-term increase in wellbeing. As a result, many argue that a truer measure of felicity would need to examine long-term contentment. Latin distinguishes very clearly between the short-term state of happiness (felix) and the longer-term state (beatus).

The most basic issue in the debate on the contribution of natural law thinking to economics is the question of the realization of human freedom. Over the past thirty years, a prominent theme of much analysis has been that political and economic freedom produce benefits, in particular gains in well-being. Sophisticated measures such as those provided annually by Freedom House are used to establish the empirical veracity (over fairly narrowly defined time periods) of this social-science claim. A parallel stream of thought tried to make the claim that religious practice was desirable and beneficial because—again as demonstrated empirically—it was associated with gains in income and wealth. The social-science analysis of religion in this kind of way goes back at least to Max Weber’s famous identification of the Protestant ethic with the “spirit of capitalism.”

The empirical argument for faith and freedom can be deeply distorted and quite destructive. Freedom has a value—or represents a truth—in itself. Religious values are not derived from their potential material benefits but from a transcendent order. Even though it may be true that faith and love represent a powerful tool in tackling poverty, they do that because of their intrinsic value as expressions of what is truly human. The greatest contribution that the natural law tradition provides is its powerful insistence on a hierarchy of value, in which value as such is recognized, rather than appearing as an instrumental tool for some other purpose.


Harold James is Professor of History and Public Affairs at Princeton University. He is a Senior Fellow of the Witherspoon Institute, where he is also the Director of the Program in Ethics, Culture, and Economic Development. His most recent book is The Creation and Destruction of Value. He sits on the editorial board of Public Discourse.

Copyright 2009 the Witherspoon Institute. All rights reserved.

Across the pond, British developments after the Labour Party landslide of 1997 offer useful lessons for the United States, perhaps even an anticipation of what might be in store for us. At the same time, it is important to look beyond the transition phase, and think about how and where to begin the task of moral reconstruction and economic recovery.

In both Britain and the United States, a financial crisis destroyed the fragile coalitions of the political right. British Conservatives never recovered after the debacle of “Black Wednesday” in 1992, when Prime Minister John Major and his Chancellor of the Exchequer looked at computer screens which showed their exchange rate policy disintegrating within minutes. Before the intensification of the financial crisis of 2008 in mid-September, the outcome of the U.S. Presidential election looked quite uncertain, but after the market jitters the outcome was unmistakably clear. We should ask why conservative coalitions tend to be blown up in this way by the political fallout from money.

Generally speaking, financial crises destroy a tenuous and fragile association of market liberals, who may tend to libertarianism and universal permissiveness, and social conservatives, who often worry that the anarchy of the market is undermining traditional norms. Haldane’s commentary illuminates a further division, and one that emerges more powerfully in the aftermath of crises, between those who think that their preferred solutions are universally generalizable, and should either appeal to or be imposed on the rest of the world, and those who prefer to confine themselves to the boundaries of their own country. The tensions between economic and social conservatives emanate from differing understandings of public policy. They raise in a direct way the question of how the links between morality and public policy should be drawn. The economic conservatives tend to give a minimalist answer to what the bounds of policy should be, while social conservatives like to push for a maximalist answer.

In fact, though, a specifically and rationally grounded moral approach to public policy issues does not and should not start with public policy as conventionally conceived. This is because public policy runs on quite different lines and requires an entirely different ethic of responsibility than individual decisions do. Social reality is very complex, so that a simple and well-intended policy prescription often produces exactly the opposite effect of what is intended. The most striking example of such a development is the one that generally brings economic and social conservatives together in their assessment of the outcome of a major stream of twentieth century development. That is the story of how, over a sustained period of time, policies in many countries were designed to free people from the humiliations of poverty and dependency on the arbitrary whim of employers by establishing social insurance schemes. The original impulse for the welfare state was a noble aspiration, but it ended by creating new forms of dependency on state welfare payments, demoralizing and de-motivating the recipients, and tearing them out of any supportive social framework that they might have previously had.

There may be an alternative to the top-down formulation of new overall strategies. This alternative would work in a more decentralized and spontaneous way, corresponding to the tradition of subsidiarity, and look for answers at the lowest possible level of institutional existence. Likewise, the major faith traditions can exert a powerful force, not as a policy option, but as what modern media strategists would call a “viral message.” Faith produces personal transformation, not in a solipsistic way but rather by means of a transformation of the person’s immediate environment. If many people start to transform their immediate environment in a more respectful way, the result may be as dramatic and powerful as the response to a conventional policy initiative. It also, incidentally, may be a more efficient answer too.

The alternative formulation of responses as spontaneous also emphasizes the extent to which they do not depend on overall plans. An insistence on the immediacy of responses of mercy in misericordia or splannizesthai derives etymologically from the heart or the guts, not from the operation of the rational center of the brain. We act spontaneously because of some flash of vision, which may be described as the recognition of intrinsic humanity, the sense of sharing or of solidarity, or indeed the operation of grace. There are theological explanations of the effect, but also the entirely secular and highly influential account of “sympathy” given in Adam Smith’s Theory of the Moral Sentiments. The sympathetic response offers a new type of answer to the question of the morality of the market economy.

At the moment, capitalism has an undoubtedly bad reputation. Financially-driven globalization, the fruit of policy deregulation, seems to have gone very badly wrong. But the strongest temptation for current policy is to swing back too radically in the opposite direction, and to try to control capitalism too much. That can lead to policies with effects that are poorly understood, and thus extremely likely to lead to a slew of unpleasant unintended consequences. Haldane takes a phrase from an essay by Elizabeth Anscombe: “the capitalistic system necessarily leads to things like a housing shortage: that is the epitome of its consequences.” That essay was produced in the aftermath of the experience of the 1930s, when capitalism also seemed to have been completely discredited. The logic of warning against “systems” and their consequences was powerful, but Anscombe directed her attack at the wrong target in this case. The response which she typifies often came from Christians: it is the response of Savonarola’s bonfires of the vanities, or of Martin Luther’s condemnation of long-range luxury trades.

The meltdown of capitalism produced a big blame game both in the 1930s, when industrial capitalism broke down, and today, when it is financially driven capitalism that has gone wrong. Today the collapse is widely thought to be the responsibility of poor regulators and monetary policy makers, or unscrupulous mortgage originators, or greedy banks. Popular commentators like to go back to stereotypes from earlier eras, such as the figure of Gordon Gekko in Oliver Stone’s movie Wall Street who memorably proclaimed that “Greed is good.” The genius of a market order is that it restrains greed. In its normal operation, it contains possible operations by placing precisely defined financial limits on them. By contrast, greed under communism or central planning is limitless and can be translated into a potentially infinite bureaucratic power-grab.

Revulsion against the market economy often takes the form of a specific condemnation of debt and debt instruments. The Old Testament famously recommended a cancellation of debt every forty-nine years in a “jubilee.” The medieval church attacked usury. Today debt is even more prominent, and debt instruments now account for over eleven times the total output of the world economy. Consumers in advanced industrial countries (in particular, the United States) rely on debt in order to buy. Treasury Secretary Henry Paulson recently complained that the credit crunch was “making it more expensive for families to finance everyday purchases.” We borrow from one another on an increasingly grand scale because of the conviction that our utility schedule is more important than someone else’s.

We also borrow because there are more and more sophisticated ways of carrying out lending. The recent boom of securitization meant that it was easy for claims on property to be repackaged and resold in the form of financial instruments that made it hard to see any relationship between the asset and the fundamental object underpinning its value.

Looking back at moments when Christianity’s viral message was most effective, we see times of social coherence and a considerable capacity for innovation. Those times depended on a modesty or a self-restraint about the nature of indebtedness, and an awareness of precisely what was being pledged in return for a financial advance. The early phases of capitalism depended on markets for debts, but for specifically understood debts that were built on knowledge and hence on responsibility. Renaissance Florence, or the pious Calvinists of the Netherlands and New England who gave rise to Max Weber’s famous thesis on the Protestant Ethic and the Spirit of Calvinism, were high moments of civic-mindedness and the other-directedness of human energy and imagination. Responsible investment and profound innovation created employment and new possibilities. Even as a minority faith, in rather alien circumstances (such as the contemporary U.K.), Christianity could have a dramatically transformative effect. But what it cannot do is translate itself into a simple policy plan.

One of the most striking characteristics of modern commercial society has been the elevation of the principle of “choice” to the status of an absolute dogma. Milton and Rose Friedman’s Free to Choose was a much more radical, and much more unbalanced, tract than anything that Adam Smith wrote. There is a danger that such choices will be made in the absence of a notion of responsibility or duty, in particular of an awareness of how the nature of the choice may affect others, may restrict the choices of others, and may also influence and restrict one’s own later choices.

It is the concern with responsibility in choice that should dictate what particular concern we should have for broader policy issues. Our policy needs to be of the type that will allow a multiplicity of human interactions. Thus to return Elizabeth Anscombe’s example: can capitalism provide houses? Of course it can. And there are plenty of examples of socialism producing remarkable scarcities of housing. The American problem lies in the fact that it (or rather market distortions) seems to have produced too many houses. We need to worry about the sort of houses and the quality of life that they offer. We do not need more dehumanized vast housing projects that make inhabitants feel anonymous. But we probably don’t need a proliferation of individualized but yet remote “McMansions” either. If we choose the wrong kind of house (and we need to remember that in the absence of compelling policy we are free to choose), we will live with the consequences in the form of social isolation.

We need policies that make for a higher awareness (and a sense of limits) while making choices, and which in consequence promote respect and responsibility. One way to promote this is through truthfulness and transparency. The problem with complex financial derivatives was not that they were market-based, but that they obscured through a series of transformations the link between the underlying asset (a mortgage on a house) and the assets that were repackaged, sometimes several times, and sold in the repackaged form to new buyers who could not assess the underlying values involved.

Most fundamentally, we need to think of ways in which individuals do not think of themselves as detached solitary players, but are committed to a network of relationships around them. Historically, the most important and most enduring of the institutions that bring individuals into society is the family. Functioning families relate to other families and to a wider world; and they do not think of themselves in simply competitive terms. Conversely, there is a clear link between family breakdown and a wider social disintegration (as was recognized by Barack Obama in his moving Father’s Day address).

We should not think of the market as something disembodied from the rest of society, but rather something that arises out of an ethic of responsibility. When it fails, that is a general failure of responsibility, and the failure can only to a very partial extent be repaired by policy initiatives from the top. The solution requires innovations from below—from what Edmund Burke called the “little platoons.” We need to think of ways in which those little platoons can be inspired and mobilized.


Harold James is Professor of History and Public Affairs at Princeton University. He is a Senior Fellow of the Witherspoon Institute, where he is also the Director of the Program in Ethics, Culture, and Economic Development. He has authored many books including most recently, The Roman Predicament: How the Rules of International Order Create the Politics of Empire. He sits on the editorial board of Public Discourse.

Copyright 2008 the Witherspoon Institute. All rights reserved.

Crises are frequently an opportunity for making dramatic policy shifts. The urgency of the situation means that debates and discussions get cut short, and that we settle for stopgap measures. This is unfortunate, for crises should be an opportunity for a more profound reflection on why and where we went wrong.

What is the best way of thinking about a financial meltdown? Finance involves a dense network of contracts—legally enforced promises. But the problem is that it is often in the self-interest of some of the participants to renege on the contracts. Big bailouts encourage people to think about the possibility of getting out of the promises they have made without suffering the consequences. That is why no one likes them—until, that is, it becomes clear that too many people have made too many promises that they simply cannot fulfill. At that moment, we hope that someone else will take on all the responsibilities. In modern times, we expect the government to appear like the rescuing cavalry at the end of an old Western.

The current debate has become crudely polarized between a dwindling minority who see markets working efficiently and justly, and those who think that the correct response to market failure is an expansion of state regulation and control. By now the former group includes almost no one. The complex pyramid of financial intermediation appears to be discredited and almost universally execrated, not just by the usual suspects, moralists and Anglican church leaders, the French President or the German Finance Minister, but also by the American political mainstream. In the United States, traditionally the home of free market capitalism, both the presidential candidates and their vice-presidential nominees have made ”greed” on Wall Street the central culprit.

It is common to observe a pendulum swing between the market and the state: with a strong orientation toward the market in the nineteenth century, and then reactions against it in the anti-trust Progressive Era and during the New Deal. After the 1970s, the pendulum began to swing in the opposite direction, towards deregulation and liberalization. The apparent disappearance of national frontiers as a barrier to transactions (the phenomenon often described as globalization) returned the world to an appreciation of the relative virtues of the market and of regulation not seen since the nineteenth century.

A longer term look would ask: Is there anything before this nineteenth and twentieth century—and now twenty-first century—oscillation between the state and the market? Anything that might help us sort out our current dilemmas?

Indeed there is, and we need not pose the dilemma as one between markets and states, for there exists a long tradition emphasizing the importance of ethics in the conduct of a business life that is both efficient and just. Its most sophisticated exposition occurred in Thomist elaborations of Aristotelian ethics. Eighteenth century Enlightenment thinkers also made ethical conduct a central feature of their political economy. These traditions did not supply simply utilitarian reasons for behaving ethically, but they did emphasize that ethical behavior brings many benefits, and that an unethical society is dissatisfied and destructive.

The Conditions of Trust

By the beginning of the twenty-first century, however, these older approaches became largely extinct. Instead, new sorts of institutional answers—legal and corporate—had evolved to address the type of questions once addressed by the ethical tradition. The older tradition is not useless, and we would do well to reconsider its merits.

In the first place, a strong ethical framework answered a critical and quite practical question that is central to the operation of a market economy and in particular of financial markets: How can I trust the person with whom I am conducting a business transaction? In the Aristotelian tradition, businesses developed simply as an extension of the household, the oikos, and the kind of trust that was required for business dealings developed simply as an extension of personal honesty and reputation. There was no distinction between personal and business behavior.

Markets depend on promises about future conduct that clearly may be broken when circumstances are not conducive to the keeping of the promise—and so they entail risk. If the contract is one that is often repeated, between partners who know each other, there is an obvious self-interest involved in not reneging on it. But such immediate self-interest does not exist in the case of once-only transactions, especially if the business partner is separated by a long geographic distance—then there is a multiplication of the incentives to cheat. On these grounds, Aristotle was skeptical about the possibilities of long-distance trade, which he thought provided temptations for immorality and abuse. Later, in the Enlightenment, a highly influential school of thought developed according to which commerce was the originator of a civilizing impulse. This tradition tended to celebrate local commerce, which brought people into regular contact and thus educated them. At the same time, it tended to disparage commercial contacts with very different types of people, who lived a long way away, and which were necessarily much more occasional. The market was far from an abstraction, but rather a daily education in civics.

In the course of modern economic development, the traditional approaches were overtaken by a new view which appeared to hold out the possibility of faster economic growth. Two features offered a new stability for the network of promises. First, the regulation of business conduct through legislation emanating from states which had a new kind of legitimacy founded on popular sovereignty took the world away from the rapacious sovereigns of early modern Europe. Secondly, and equally transformative, was the growth of the modern notion of a business corporation which could internalize its ethical problems, and could appear to be fully rational.

These developments brought an answer to the problem of trust that did not depend on personal honesty. It was institutional innovation rather than personal behavior that allowed the establishment of relations based on confidence over a long distance. In consequence, business conduct was separated from personal conduct and so judged by different measures. Different spheres of human activity carried expectations of different behavior or even multiple personalities. A business man would be calculating and aggressive in his firm, and warm and emotional with his family at home. (This was a contrast to an old world, in which there was often no physical separation between home and work, and in which—incidentally—women played a much more prominent role.)

The primary cause of a new confidence about business dealings came from changes in the legal environment. It was the law rather than an advanced ethical sensitivity that provided a shared backdrop that made for a newly enhanced sense of security in commercial transactions and allowed for an explosion of economic activity. An influential interpretation (”law and economics”) of British and American development sees in the common law a legal form that made these societies uniquely and unprecedentedly successful.

Almost every modern interpretation of the preconditions for successful economic development emphasizes the importance of the effective enforcement of property rights. States should refrain from destroying expectations of stability by simple expropriation, or by monetary experimentation. Where, by contrast, there is no legal security or the legitimacy and dependability of the political system is eroded by widespread corruption, potential entrepreneurs will have no faith that their property rights will be respected, and in consequence they will hold off from entrepreneurial activity.

The Corporate Person

A further critical historical shift that facilitated the development of the modern economy involved an extension of the notion of who should do the contracting. The introduction of the modern limited liability joint stock corporation made possible a much broader range of contracts: with the providers of finance (thus solving a finance issue that had previously restrained economic development); with suppliers and customers; and with workers. Though there were corporations in medieval and early modern Europe, they were highly restricted in what they might do.

Companies acquired a legal personality and could be held accountable for their actions. When a company does something wrong, it—rather than the individuals who made the error—is responsible for the consequences of the decision. But the notion of a firm as analogous to a natural person soon extended into many different areas. At the same time, new techniques of branding helped to give the impression that there also existed a corporate personality, a corporate culture, and a corporate social role. Companies began to think that they needed corporate biographies that told the story of how their structure and image molded the personalities of their employees. A strong corporate culture was widely thought to be important in motivating employees as well as customers.

In the twentieth century, the corporate image played a central role in the creation of consumer culture. Companies that dealt with large numbers of customers particularly needed to cultivate an image that was personal, either by the adoption of an animal or human emblem, such as the Exxon tiger, or by naming the firm after a real or fictitious person. To take some of the best known retailers in the modern United States, Martha Stewart is a real person (with real regulatory problems) while Ann Taylor is a fictitious person. Even if the firm was not named after its chief executive, the celebratory CEO became in the last quarter of the twentieth century, especially in the United States, an easy path to establishing a corporate identity. The path was pioneered by Lee Iacocca’s charismatic use of his own personality to rebrand the staid image of Chrysler. Especially by the 1990s, CEOs such as General Electric’s Jack Welch or Hewlett Packard’s Carla Fiorina became a standard part of the new American way of doing business.

The corporation became a way of splitting up and repackaging responsibilities, in the same way that investment banks and their Structured Investment Vehicles became ways of re-bundling assets. In consequence, in part because of legal and regulatory issues of corporate responsibility, and in part as an extension of a motivational and marketing device, the analysis of behavior and personality moved from the individual level to that of the corporation. The analysts of this development often used medical and psychological language: companies as well as individuals could be healthy or sick, complacent or neurotic or even psychotic. If the company was a real personality, put together by skilful PR strategists, then the individuals working in the company did not need to behave like real or ethical people. In a flattened business structure, where the corporation cannot be effectively controlled hierarchically, the individual personality matters much more. The individual is a whole person, whose activities cannot easily be segregated into public (business) and private.

The need for trustworthy individuals is even more acute in a technological age. For industries where a quick pace of technical change and globalization make governmental regulation ineffective, the differences between systems of values and cultural norms become much more apparent. We have lost the idea of a common culture and a common morality. In consequence, there is an even greater need for ways of guiding individual behavior so that it is trustworthy and constructive, but the intensity of the new demand overstrains those mechanisms, the government and the corporation, that are supposed to provide it.

The problem of trust cannot simply be unloaded onto governments and regulatory agencies, which are in no position to grasp the complexities of the problems they are required to solve. It is in these circumstances that a much older tradition has a crucial part to play in a quickly changing and very modern world, and in holding together a world that seems to be rapidly coming apart.

Harold James is Professor of History and Public Affairs at Princeton University. He is a Senior Fellow of the Witherspoon Institute, where he is also the Director of the Program in Ethics, Culture, and Economic Development. He has authored many books, including: The End of Globalization: Lessons from the Great Depression, The Deutsche Bank and the Nazi Economic War against the Jews,  Europe Reborn: A History 1914-2000, Family Capitalism: Wendels, Haniels, Falcks, and the Continental European Model, and The Roman Predicament: How the Rules of International Order Create the Politics of Empire. He sits on the editorial board of Public Discourse.

Copyright 2008 The Witherspoon Institute. All rights reserved.